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Physical Distribution System

By Anonymous - Posted on 13 January 2012

The objective of distribution management is to design and operate a distribution system that attains the required level of customer service and does that at least cost. To reach this objective, all activities involved in the movement and storage of goods must be organized into an integrated system.

In a distribution system, 6 interrelated activities affect customer service and the cost of providing it:
- Transportation. Transportation involves the various methods of moving goods outside the firm’s buildings. For most firms, it is the single highest cost in distribution, usually accounting for 30% to 60% of distribution costs. Transportation adds place value to the product;

- Distribution inventory. Distribution inventory includes all finished goods inventories at any point in the distribution system. In cost terms, it is the second most important item in distribution, accounting for 25% to 30% of the cost of distribution. Inventories create time value by placing the product close to the customer;

- Warehouses (distribution centers). Warehouses are used to store inventory. The management of warehouses makes decisions on site
selection, number of distribution centers, layout and methods of receiving, storing and retrieving goods;

- Materials handling. Materials handling is the movement and storage of goods inside the distribution center. The type of materials handling equipment used affects the efficiency and cost of operating the distribution center. Materials handling represents a capital cost;

- Protective packaging. Goods moving in a distribution system must be contained, protected and identified. In addition, goods are moved and
stored in packages and must fit into dimension of the storage spaces and the transportation vehicles;

- Order processing and communication. Order processing includes all activities needed to fill customer orders. Many intermediaries are involved in the movement of goods and good communication is essential to a successful distribution system.

Total-cost concept
The objective of distribution management is to provide the required level of customer service at the least total system cost. What happens to one activity has an effect on other activities, total system cost and the service level. Management must treat the system as a whole and understand the relationship among the activities.

There are 2 related principles illustrated here:
- Cost trade-off. The cost of transportation increased with the use of air transport, but the cost of carrying inventory decreased. There was a cost
trade-off between the 2;
- Total cost. By considering all of the costs and not just any one cost, the total system cost is reduced. Note also that even though no cost is attributed to it, customer service is improved by reducing the transit time. The total cost should also reflect the effect of the decision on other departments, such as production and marketing.

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